Arrow’s Impossibility Theorem

• Don’t get bogged down in the assumptions and jargon
• Simply put, under reasonable assumptions about voting and preferences, there is no voting system that can produce an efficient outcome without dictatorship
• dictatorship can just mean that some votes count more than others
• The other option is to accept an inefficient outcome where a different result could make at least one person better off without making anyone worse off.¹

Why are economic development and political development correlated?

Richer¹ countries are more likely to be democratic.

Democratic countries are more likely to be rich.

Why?

Why are economic development and political development correlated?

General Possibilities:

Democracy leads to economic development.

Economic development leads to democratization.

Something else leads to both.

Why might democracy cause economic growth?

1. Security for investment

What is investment?

Investment does not have to involve business or money. Investment is giving up current consumption in order to gain something greater in the future.

What are some examples of investment that do not involve the business and financial investments we usually think of?

Writing: Give an example of a non-business/non-financial investment. Explain how it fits the definition. That is, what is given up now and what is expected to be gained in the future?

Protecting investment

Thought questions: Can a government that does not secure financial/business investment be expected to secure other types of investment? Is the effect of security for the very small investor as important as security for the large investor in economic development?

Why might democracy cause economic growth?

Security for investment

• Constraining the executive creates security against the state

    - Constraning: Limiting the power

Why might democracy cause economic growth?

Security for investment

• Constraining the executive creates security against the state

    - Constraning: Limiting the power
    - The executive: Originally the king or dictator!

Why might democracy cause economic growth?

Security for investment

• Constraining the executive creates security against the state

    - Constraning: Limiting the power
    - The executive: Originally the king or dictator!
    - Security: Protection from arbitrary seizure of property or income

Why might democracy cause economic growth?

Security for investment

• Constraining the executive creates security against the state
• Political stability - democracy reduces civil strife

Why might democracy cause economic growth?

1. Security for investment

2. Selectorate theory

Selectorate Theory

1. Democratic leaders satisfy W (winning coalition) with public goods while nondemocratic leaders give inefficient private good payoffs to W

Selectorate Theory

1. Democratic leaders satisfy W (winning coalition) with public goods

2. Improvements in public goods reduce private costs of production

   - "You didn't build that." - The private producer DID produce the good, but the public goods provided by the government helped make it possible at much lower cost.

Selectorate Theory

1. Democratic leaders satisfy W (winning coalition) with public goods
2. Improvements in public goods reduce private costs of production
3. Improves investment security - investment security as public good

Selectorate Theory

1. Democratic leaders satisfy W (winning coalition) with public goods
2. Improvements in public goods reduce private costs of production
3. Improves investment security - security as public good
4. Combination - shifting from inefficient redistribution of private goods from S to W, to a broader investment in public goods including security

Stationary Bandit incentives

“democratic political leaders are just as self-interested as the stationary bandit and will use any expedient to obtain majority support”¹

Stationary Bandit incentives

“democratic political leaders are just as self-interested as the stationary bandit and will use any expedient to obtain majority support”¹

Making the electorate better off improves re-election chances²

Stationary Bandit incentives

1. Leaders have incentive to invest in public goods to ensure future growth and re-election

Stationary Bandit incentives

1. Leaders have incentive to invest in public goods to ensure future growth and re-election
2. Protection creates incentives for citizens to invest more which takes us back to…

Why might democracy cause economic growth?

1. Security for investment

2. Selectorate theory

3. Stationary bandit incentives

Why might economic growth lead to democratization?

Modernization theory: economic security allows people to consider nonmaterial desires

Why might economic growth lead to democratization?

Modernization theory: economic security allows people to consider nonmaterial desires

• Similar to Maslow’s hierarchy of needs from psychology

Hierarchy of Needs: Personal

Maslow’s Hierarchy of Needs: https://www.simplypsychology.org/maslow.html

Why might economic growth lead to democratization?

Modernization theory: economic security allows people to consider nonmaterial desires

• Similar to Maslow’s hierarchy of needs from psychology
• Basic needs - least cooperation required: basic food, shelter, protection from wild animals
• Security needs - more cooperation required: protection from other people provided by the state
• Investment needs - security from the state
• Higher needs - Freedom, self-determination, self-government, participation

What is the process of modernization?

• Rostow (1960)

• The traditional stage

• The preconditions for takeoff

• The takeoff

• The drive to maturity

• The age of high-mass consumption

What is the process of modernization?

1. Urbanization

    - people moving to urban centers for work
    - accelerates with industrialization
    - even before industrialization, cities developed self-government systems with proto-democratic elements: guilds, merchant associations, town councils

What is the process of modernization?

1. Urbanization

2. Widespread education and literacy

    - Education and literacy are necessary for economic growth
    - Education and literacy are necessary for industrialization
    - Education and literacy increase people thinking about their relationship to government

What is the process of modernization?

1. Urbanization

2. Widespread education and literacy

3. Industrialization and advancing technological progress

4. Rationalization and decline of traditions

    - Relative anonymity of urban life
    - Decline of traditional social structures
    - Association between rationalism and technological progress

What is the process of modernization?

1. Urbanization
2. Widespread education and literacy
3. Industrialization and advancing technological progress
4. Rationalization and decline of traditions
5. Individualism
6. Growth of capitalism
7. The bureaucratic state
8. Rise of the service sector